annenberg media ♪ annenberg media ♪ in 1980, before the flap over new coke and old coke, major soft drink makers made a critical change in their beverages. why would they change a key ingredient in afollowing world war ii,cts? the studebaker corporation had its most prosperous years. why would this corporation become extinct within a decade? in the 1970s, a small new jersey newspaper, the asbury park press,

exploded into the state's third-largest newspaper. how did the company make this phenomenal growth possible? no business can guarantee it will make a profit, but there are strategies that can increase chances for success. the firm: how can it keep costs down? with richard gill, we'll investigate that problem on this edition of economics usa. i'm david schoumacher.

♪ pepsi cola hits the spot ♪ 12 full ounces that's a lot... ♪ ♪ i'd like to buy the world a coke ♪ ♪ and keep it company ♪ that's the real thing... ♪ we made our choice ♪ make it a pepsi... soft drink companies spend millions advertising to make billions in sales. it's a $23 billion-a-year industry. with that many sales, every decision is crucial. ♪ you're the pepsi generation... ♪ the words i'm about to say will change the course of history-- coca cola has a new taste. it's the best ever. in 1985, the coca cola company announced to the world

it was changing the coke formula. to millions of customers, the new taste was an outrage. the rest is history. five years earlier, a key ingredient was changed, and it went unnoticed. what was that change? why did the company risk it? in 1979, the coke company earned $420 million on sales of nearly $5 billion, but the giant corporation faced cost problems. the price of sugar was rising. donald ulrich is president of mid-atlantic coca cola. prices went from about $19, up to-- some people were paying $70 for sugar. we had to move the price of the product to retailers and consumers. that price gap was of such significance that it slowed the consumer from buying the product.

they weren't drinking as much. it had a drastic effect. worldwide weather problems and government restrictions created sugar shortages in the 1970s, sending shock waves through the industry. it took a lot of sugar to sweeten the billions of drinks sold every year. in the united states, we drink the equivalent of 465 soft drinks per year per person. coke alone bought more sugar than anyone else. dr. robert barry tracks sweetener prices for the department of agriculture. in the case of coca cola, which was using about a million tons of sugar, every one-cent increase means about $20 million. when sugar shot up seven cents a pound in 1979, soft drink makers were desperate for an alternative.

it came from one of america's most abundant crops--corn. the process of extracting high fructose corn sweetener, hfcs, was perfected by a chemist at royal crown. jesse meyers, the editor of beverage digest. at rc, there was a chemist named martha jones, who, incidentally, now works for coke, who was instrumental in developing these new products that rc was very innovative about. she has been called by many in the industry the mother of hfcs. she made sure that this product was up to the exact specific levels of each of these franchise firms and could be used interchangeably with sucrose. because american farmers produced corn so efficiently, refining those ears for sugar makes high fructose corn sweetener

about 10% cheaper than sugar from beets or sugar cane. the dictates of the marketplace say you must be a low-cost producer. in the soft drink business, this is particularly so. it's driven by the high-volume low-margin producer, any edge that you can make, that you can get, any minute thing you can shave off that makes the racer go faster, the better off you're going to be in the marketplace. would switching one sugar for another affect the product's taste and its sales? manufacturers made the change very slowly, starting fst with their mor product lines. we were concerned every step of the way, but when we were making the switches, we ran thousands of taste tests

to make sure that wasn't happening, and then chemically analyzed everything. most people don't understand high fructose is sugar. there's cane sugar, beet sugar, and corn sugar, so it is sugar. it was getting the impurities out, because processing hadn't been there to do that. it wasn't long before manufacturers of corn sweeteners could guarantee quality levels and adequate supplies. large soft drink bottlers started to convert. did it make any difference in the product? manufacturers of the soft drink companies-- coke, pepsi-- claim that it does not, that it's quite the same. there are some who would quibble with that. i don't think there was any consumer reaction. even though it wasn't a secret, the consumer wasn't aware

that we had introduced high fructose. the formula didn't change one whit. a different approach produced the same effect. we're talking about a change of pucker. it's still the same kiss. in 1980, after several years the sugar substitution worked. consumers thought it was the same coke. the company could deliver the product at substantially lower cost and maintain profit levels. soon, pepsi and coe"'s other competitors made the sugar switch. economic analyst richard gill explains why companies cannot afford to ignore cost-cutting opportunites. for soft drink producers, the change to high fructose corn syrup was an important one-- cutting costs and sustaining profits. to the consumer, it seemed a nonchange.

coke in 1980 tasted no different than in 1975. consumers generally didn't know a change occurred. still, the change did affect consumers. the substitution permitted soft drinks to be sold more cheaply than they would have been. in a competitve environment, lowered costs almost invariably translate into downward pressures on consumer prices. such substitutions are not only beneficial, they are characteristic in a market economy. there's more than one way to make coke, grow wheat, even to produce drinking water. in africa, for example, you may see water collected in this fashion. our water supply comes to us through a network of dams, reservoirs, and pipes. one big reason for this difference is that labor is cheap and machinery expensive in africa,

while labor is expensive and machinery relatively cheap here. the way we produce our products will be aected by the prices of production-- raw materials, labor, machinery. the businessman will find it in his interest to substitute cheaper factors for the more expensive-- high fructose for sugar, dams and pipes for human labor. in most cases, even when we're unaware of the change, we, the consumers, will benefit. ♪ jazzy all around ♪ with loads of room in the back ♪ ♪ studebaker lark saves you the jack ♪ ♪ big-car comfort ♪ easy to park ♪ you're going to have a ball in the lark ♪ ♪ the '62 lark studebaker had been attracting public attention with its innovative cars after world war ii. by 1948, studebaker sales soared to 300,000,

grabbing 4% of the market. profits were more than $46 million. for over a century, studebaker plants in south bend had produced quality transportation. even with its fast postwar start, studebaker could not compete. why did studebaker fail in america's flourishing automobile market? in 1852, five studebaker brothers began a business in south bend, indiana, that grew into the largest manufacturer of wagons in the world. the company moved into the automobile business, first producing car bodies, and finally buying the emf motor company. the success of this first production car briefly placed studebaker in the big three car makers. the early booms years were followed by bad decisions about new models. the depression drove studebaker into bankruptcy.

after reorganization, a streamlined management brought in designer raymond loewy to develop a new car. here is perfect balance that makes the champion hold its footing despite whirling-dervish driving. champion sales and lucrative wartime contracts brought the company back. studebaker had done a lot of work in terms of totally redesigning a new concept in automobiles. lester fox was vice president of the u.a.w. at studebaker. the new car did propel the corporation to national recognition that resulted in assembly plants in canada, the east coast, and california to meet the demand. the bullet-nose models, starting in 1949, added to studebaker's success.

people joked, "is it going backward or forward?" the line called the champion was a terrific car. it was ahead of its time in its great gas mileage and terrific comfort for four or five people. it was audacious-looking. studebaker celebrated its centennial in 1952 with its best year ever, selling some 335,000 cars, but its road to future profits took turns for the worse. 1953again, was a radical change. for the stebak corporation. a national sales manager ...the low-slung sports car. we began to run into production problems. decisions were made too late in the season to be able to tool up for them. we had extreme difficulty in getting automobiles that were shipable

and ready for the road. consequently, the demand was very heavy. there was a lot of acceptance for the automobile, but we couldn't, in volume, get them out the door. they get excited when they see a new studebaker. not everyone. car consumers were changing. people began getting choosier about what they bought. model changes became essential in the industry. the big three car makers could afford this. they could spread costs out. their large production gave them economies of scale, but it was hard on smaller independent car makers. it would cost studebaker $30 million to introduce an entirely new model. model change is terribly expensive in the industry. the low-volume producer has to amortize these costs over fewer products,

and it increases the unit cost. studebaker was really undercapitalized. we didn't have the money to make the style changes that were necessary to catch the public's fancy. sales numbers began to hurt. production fell by 2/3 in two years. making only 100,000 cars in 1954, studebaker was losing benefits of economies of scale. the company was stuck with high payroll costs negotiated during the boom years. executives tried to increase its scale of production by merging with another car maker. in 1954, an exchange of stock created the studebaker-packard corporation. the merger has been likened to two drunks trying to help one anoer across the street. i remember going to detroit and looking over the packard facilities,

and they couldn't produce cars, either. the executive parking lots and streets were full of packards because they weren't ready to ship. something was wrong with them. the financial community vetoed the merger by rejecting a $50 million loan plan for retooling to make packard and studebaker parts interchangeable. still, the company was able to offer new products in an attempt to increase sales. the lark made 1959 a profitable year, but it did not last. the big three produced compacts and dominated the market. by the time studebaker introduced its 1964 models, no amount of advertising could cover the fact that studebakers were destined to becomorphan cs. by the last year, production fell to 66,000.

market share was under 1%. despite profits in other divisions of studebaker-packard, automobile losses had hit $4o million over the last four years. in december of 1963, the board of directors voted to shut the doors. when a company goes under, everyone points a finger at everyone else. studebaker was no exception. regardless of who was at fault, the end became inevitable when the company shrank below the minimum size for survival. analyst richard gill explains. in the american automobile industry, failure has been the rule. in the early 1900s, when studebaker got serious, there were 45 different american car procers. when studebaker failed in 1963, the number was four, all of which suggest there were general factors operating.

one certainlwas size. whether you're thinking in terms of production costs, advertising, or dealer networks, the large firm is likely to have advantages over the small. economists call such advantages economies of scale. when these economies occur, the individual firs average cost per unit of output will tend to decline as its production size increases. the vertical axis is average cost. the horizontal is the quantity of output produced. economies of scale are shown by the downward slope of this average cost curve as production increases. huge firms don't always mean lowered costs. inefficient business bureaucracies can cause costs to be higher than otherwise. eventually, most firms' cost curves turn up. also, if firms get too huge, they may be able monopolize certain markets,

so lowered costs aren't always passed on to consumers. however, there is little doubt that economies of scale have made possible a greater national output and at lower costs. the folklore of american journalism is based on the excitement of producing daily newspapers-- reporters pounding typewriters, the smell of hot lead, and the deafening roar of presses. toda mosof that has changed. initially, the compute explosion in newspapers was driven by promised cost savings. analyst john morton recalls that publishers saw new technology as the cure mounting payroll costs. the had dollar signs in their eyes when the photocomposition revolution started moving into the daily newspaper in the 1970s.

most publishers recognized they would be able to eminate half of their composing rooms. as far as costs were conceed, if you look at the profit-and-loss statement, it's people, primarily. you've got people in the newsroom, in the advertising department, circulation, business, and production. it's a fairly people-intensive business. nousiness has been more completely transformed byomputer revolution anewspaper pubshing.the rscompua nousiness has been more completely transformed didn'tppear in city room byomputer revuntil 1970. 11 years later, there were 40,000. you might expect large publications to switch to computers to improve productivity, but why would a small paper make the costly commitment to this technology? the asbury park press started by the sea

and stayed by the sea, covering boardwalks and tourists. for most of its life, it's been a typical resort paper, growing slowly, improving its production plant, adding space to its office building. by 1960, it was selling 27,000 papers a day. then communities began springing up around the resorts. the population of central new jersey exploded almost as fast as the career of native son bruce springsteen. ♪ i had a brother back in 'nam ♪ ♪ fighting off the vietcong... ♪ reporting on everything from rock music to real estate for central nejersey meant expanding fast. soon, the newspaper was covering an area almost 30 miles east to west and 60 miles north to south. how could they create a regional product

without losing thspecial local quality that appealed to freehold or red bank? tom jobson is managing editor of the newspaper. they have 85 municipalities in those two counties.nties. we cover each one, either by stringers or staff, two or three towns for each reporter. we cover the county seats of both coties. we've expanded because of demands for news of local interests-- a bureau in atlantic city and newark, and four reporters in trenton. we put a reporter in washington to get the news we wanted. so it's a complete newspaper with hometown flavor. how to maintain that hometown flavor? john morton. dailies respond to this by creating a special section--

done on a daily or weeklbasis-- devoted specifically to each suburban community. you'll have suburban news and advertising from that community. it's a targeted edition of the newspaper. new technology allows newspapers to do that in a more efficient way. to produce news for individual communities, the asbury park press turned to the computer, or more accurately, many computers-- in the city room to file stories, in the classified advertising department to take in information, in makeup to put together ads, in composing to control the phototypesetter, and in the art department to create graphics. most importantly, the computers allow editors to tailor separate editions for different regions. frank o'hearn is thcomputer systems editor.

for a zoned edition, you can complete one edition, press one ke that copies the entire page, and sub pieces of the page. a copy is done in about five or eight seconds. the result is nine zoned editions, almost one for each point of the compass in the two counties. there's a different special section inserted into each day's paper, and the capability to do extra tabloids on almost any subject from real estate to cars. the results have been impressive. in 25 years, the circulation of the asbury park press has grown five-fold, from 27,000 to 127,000 daily, simultaneously, the paper's size has grown, and advertising linage has doubled and tripled.

the publisher of the newpaper isules plangere, jr. computerization allows us to do the many things we do, and without computers, we wouldn't produce the product we produce. the publishers of the asbury park press, concerned with keeping pace with growth, don't dwell on how much computers have saved them. analysts note that without computers, labor costs would have increased rapidly, eating into the profits. richard gill points out how new technology can change the cost picture for businesses. under the pressures of competition, businesses cut costs in many ways. they substitute less expensive inputs high fructose corn syrup for for sugar.xpensive-- they try to exploit economies of scale, as in the automotive industry. most significantly, they can introduce,

as the asbury park press did, new technology. here's a typical firm's average cost curve. up to point a, costs are falling with increasing output-- economies of scale. after a, the firm is getting too cumbersome, and the curve turns up again. what innovation does is lower the entire curve. it shifts average costs downward, all along the line. much of the history of american economic progress can be told in terms of downward shifts due to innovation. these various methods of cutting costs tend to go together. the asbury park press was an innovator. it also substituted one factor of production for another-- machinery for labor, and produced at a much larger scale.

cutting costs, virtual necessy for businessesuced who wish to stay in business, and their necessity ultimately rebounds to our, the consumers', benefit. to survive in rapidly changing markets, businesses must take risks to cut costs wherever they can. by substituting cheaper raw materials or new technology, managers can increase their margins of profits. if they can't keep up with change, they're forced to shut their doors. for economics usa, i'm david schoumacher. captioning is made possible by the annenberg/cpb project captioning performed by the national captioning institute, inc. captions copyright 1986 educational film center

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